The market saw its chance to rise up against the Great Financial Repression and managed to take 10-year Treasury yields up 25 basis points over the past two days. So far, so good, however, as bonds are currently reacting to a stronger economy and a Fed that may be handcuffed by rising oil prices, a better economy, the recession of European sovereign risk, and domestic politics.

..the Fed holds over 40 per cent of the Treasuries outstanding in several of the years in which they mature. In many of the specific maturities, the Fed owns up 60-70 per cent of the total outstanding issue.

The Fed had to “relax” its self imposed 35 per cent limit on SOMA holdings of individual issues and included recently issued securities in order to execute its maturity extension program announced last September. It’s going be interesting to see how longer-term interest rates behave as the economy regains some of its mojo and money comes out of the Treasury safe haven.

The Fed has yet to fight the markets in its repression of long rates as Operation Twist has been riding the tail winds of positive market psychology and strong demand for safe havens due to Europe’s sovereign debt and banking crisis…

We’re the first to admit nobody knows the future, most of all us, but we smell a potential fight or flight in the bond market, comrades. An Arab Spring in the bond pit, if you will. With oil prices north of $100 and rising rents, which is the largest component of the CPI, it is our sense the Fed better be able “to float like a butterfly and sting like a bee.”

The bond market landed a couple of huge body blows in the past two trading sessions. Let’s now see how the Fed counterpunches.

That could be dangerous, however, with China and Japan’s current account surplus now shrinking or turning negative thus bringing an end — temporarily, or not — to the recycling of surplus dollars back into the Treasury market. It is going to be interesting, folks.

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